The deal to rescue Allegheny Health, Education and Research Foundation's four remaining hospitals has cleared an important hurdle, passing muster with federal antitrust regulators earlier this month.
The two-hospital Western Pennsylvania Health System and AHERF, both based in Pittsburgh, filed papers on the transaction that went unquestioned by the Federal Trade Commission during the 30-day review period that expired June 11.
"The largest hurdles have been overcome," said Dennis Morabito, spokesman for the group of AHERF hospitals known as Allegheny University Hospitals-West. "The clearance of the FTC was something that could have been an issue, a big one."
Federal antitrust clearance was a question mark not because of market share but because of strenuous objections to the deal from a group of physicians and a competing hospital system.
In written complaints to the FTC and the U.S. Justice Department, the 2,000-member Pennsylvania Society of Internal Medicine and the University of Pittsburgh Medical Center Health System expressed concern that Highmark Blue Cross and Blue Shield, which is making a loan to WPHS to buy the AHERF hospitals, might use its alliance with the new system to discriminate against other providers (March 29, p. 2).
Despite the absence of antitrust objections, the WPHS deal to acquire the four hospitals, anchored by one-time AHERF flagship Allegheny General Hospital, is far from done.
AHERF and WPHS still must complete a formal settlement agreement and win the approval of the U.S. Bankruptcy Court in Pittsburgh.
A source familiar with the negotiations said that agreement could be completed soon.
Financing for the deal, which is structured as a merger, also must be completed. Recent removal of some controversial requirements of the $125 million loan from Highmark has moved that piece of the financing along. One of those requirements would have given Highmark the authority to appoint the majority of WPHS' board members if the new system missed two consecutive loan payments (May 31, p. 2).
The merger also must get the green light from the Pennsylvania attorney general and state Orphans Court.
"The transaction has been extremely complex, requiring a number of approvals and involving many constituencies," Charles O'Brien, WPHS' president and chief executive officer, said in a statement. "We are very pleased with our progress to date."
Meanwhile, the prime competitor to the proposed six-hospital system has raised fresh objections. The UPMC system, tertiary-care rival to both Allegheny General and Western Pennsylvania Hospital, has waged a no-holds-barred campaign to scuttle the system before it sets sail.
The FTC's silence on the transaction signaled the failure of UPMC's attempts to persuade regulators to block the deal on grounds that it would be anti-competitive.
Far from admitting defeat, UPMC has opened a new front in its war against the deal. The system commissioned an economic analysis by Reynolds & Co., a New York-based consulting firm. The firm's report pans the merger, saying that the new system "is highly likely to become insolvent by 2003 and might be in default" as soon as 2000.
According to the Reynolds report, the new system is likely to have a $42 million loss in 2003 instead of a projected profit of $13 million because of revenue reductions under the Balanced Budget Act of 1997.
Further, the cost of servicing more than $500 million in debt could mean that as many as 2,000 to 3,000 employees, or about 18% of its work force of 13,300, would have to be cut, according to the Reynolds analysis.
For their parts, WPHS and AHERF both vehemently rejected the latest contentions by the rival system.
"The report is too absurd to be worthy of detailed comment," said Nancy Grover, a WPHS spokeswoman. "One should consider the source of the document, UPMC, when evaluating it."